Canada: To Mitigate Or Not To Mitigate? Ontario Court Of Appeal Answers

A recent decision of the Ontario Court of Appeal, Bowes
v. Goss Power Products Ltd.,1 held that the
duty to mitigate is no longer presumed to apply when there is a
fixed severance entitlement negotiated into the termination clause
of an employment agreement.

The duty to mitigate is a common law principle that, in the
employment context, requires employees who are terminated without
notice or with insufficient notice to look for a new job. Any
remuneration earned with the new employer reduces damages that can
be recovered from the employee's former employer as a result of
the wrongful dismissal.

The Court of Appeal overturned a lower court's finding that
a fixed severance entitlement is subject to the duty of mitigation
unless the agreement, either directly or by implication, relieves
the employee of this obligation. The lower court had wrongly
decided that an agreement specifying a fixed severance entitlement,
in the event of a dismissal without cause, was akin to damages in
lieu of reasonable notice at common law and that there was a
presumption that the employee had a duty to mitigate.

Peter Bowes commenced employment with Goss Power Products in
October, 2007 as its Vice President, Sales and Marketing pursuant
to an employment agreement which stated that:

The Employee's employment may be
terminated in the following manner and in the following
circumstances: ...

(c) By the Employer at any time
without cause by providing the Employee with the following period
of notice, or pay in lieu thereof: ...

(iii) Six (6) months if the
Employee's employment is terminated prior to the completion of
forty-eight (48) months of service.

The agreement went on to provide that the agreed-upon notice
period was in compliance with Bowes' minimum entitlements under
the Employment Standards Act, 2000 and was inclusive of
all amounts owed to the employee under statute or common law.
However, the employment agreement, drafted by the employer, was
silent with respect to the duty to mitigate.

The employer later terminated Bowes without cause. The
letter of termination stated that he would be paid his salary for
six months but was required to seek alternative employment during
this period and keep the employer apprised of his efforts in this
regard. Approximately two weeks after he was terminated,
Bowes obtained a new position at the same salary he was earning
with Goss Power Products. After paying the statutorily
required three weeks' salary, the employer stopped making any
further payments.

Bowes brought an application in the Superior Court of Justice
asking for a determination of his rights pursuant to the employment
agreement. The application judge held that where an
employment agreement contains a fixed severance entitlement, the
agreement is subject to the duty to mitigate unless the agreement,
either directly or by implication, relieves the employee of this
obligation. Since the agreement provided no such exemption from the
duty to mitigate, Bowes was not entitled to the full amount
provided for under the agreement because he had mitigated his loss
by finding new employment.

The Court of Appeal overturned the application judge's
decision and concluded that where an agreement provides for a
stipulated sum upon termination without cause and is silent as to
the obligation to mitigate, the employee will not be required to
mitigate on the basis that:

By contracting for a fixed sum the parties contracted out of
the common law "reasonable notice" approach or damages in
lieu thereof. There is no material difference whether the quantum
contracted for is fixed or readily calculable from the terms of the
agreement;

By specifying an amount, the stipulated quantum is
characterized as either liquidated damages or a contractual
sum;

It would be unfair to permit an employer to opt for certainty
by specifying a fixed amount of damages and then allow the employer
to later seek to obtain a lower amount at the expense of the
employee by raising an issue of mitigation that was not mentioned
in the employment agreement; and

It is counter-intuitive and inconsistent for the parties to
contract for certainty and finality, and yet leave mitigation as a
live issue with the uncertainty, lack of finality and risk of
litigation that would ensue as a consequence.2

Consequently, Bowes was entitled to the amount of salary in lieu
of notice specified in his employment contract notwithstanding any
salary he earned with his new employer.

Comment

The duty to mitigate at common law emphasizes economic
efficiency, as the employer's liability is limited to the
extent that the employee is able to obtain alternate work. However,
as a result of this case, this principle can no longer be assumed
to apply where a termination provision with a fixed notice or
severance entitlementhas been negotiated – even if the
employer explicitly informs the employee of his or her duty to
mitigate the loss of employment at the time of termination.

The decision in Bowes also demonstrates that the courts
will strictly interpret employment agreement termination clauses in
favour of the employee's interests. In this way, the
Court of Appeal's ruling is similar to the recent Ontario
Superior Court decision in Wright v. The Young and Rubicam
Group of Companies (Wunderman), which was detailed in a
previous Osler update.

Employers who want to stop paying severance to an employee
terminated without cause if the employee is successful in finding
new employment should expressly reference the employee's duty
to mitigate in the event of termination in the employment
agreement.

Patrick Welsh has a broad corporate-commercial
litigation and dispute resolution practice, with experience in
environmental law and litigation and environmental due diligence.
Steven Dickie's practice involves drafting and
advising on workplace policies, employment contracts, executive
compensation arrangements and corporate transactions.

Footnotes

1 2012 ONCA 425 (Bowes).

2 Bowes, at para 61.

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